Buffets Letter 2017



capricious: That requirement will produce some truly wild and capricious swings in our GAAP bottom-line

/kəˈprɪʃəs/
adjective
given to sudden and unaccountable changes of mood or behaviour."a capricious and often brutal administration"synonyms:fickle, inconstant, changeable, variable, unstable, mercurial, volatile, erratic, vacillating, irregular, inconsistent, fitful, arbitrary; impulsive, temperamental, wild, ungovernable; whimsical, fanciful, flighty, wayward, quirky, faddish, freakish; unpredictable, random, chance, haphazard"the capricious workings of fate" ; changing according to no discernible rules; unpredictable."a capricious climate"

In our search for new stand-alone businesses, the key qualities we seek are 1 durable competitive strengths; 2 able and high-grade management; 3 good returns on the net tangible assets required to operate the business; 4 opportunities for internal growth at attractive returns; and, finally, 5 a sensible purchase price.

the key qualities we seek are 1 durable competitive strengths; 2 able and high-grade management; 3 good returns on the net tangible assets required to operate the business; 4 opportunities for internal growth at attractive returns; and, finally, 5 a sensible purchase price.

ripening:  If Wall Street analysts or board members urge that brand of CEO to consider possible acquisitions, it’s a bit like telling your ripening teenager to be sure to have a normal sex life.

Our aversion to leverage has dampened our returns over the years. But Charlie and I sleep well. Both of us believe it is insane to risk what you have and need in order to obtain what you don’t need.

Despite our recent drought of acquisitions, Charlie and I believe that from time to time Berkshire will have opportunities to make very large purchases. In the meantime, we will stick with our simple guideline: The less the prudence with which others conduct their affairs, the greater the prudence with which we must conduct our own.

The less the prudence with which others conduct their affairs, the greater the prudence with which we must conduct our own.

long-tail business: we have specialized in jumbo reinsurance policies that leave us assuming long-tail losses already incurred by other p/c insurers.

As well-known analyst V.J. Dowling has pointed out, the loss reserves of an insurer are similar to a self-graded exam. Ignorance, wishful thinking or, occasionally, downright fraud can deliver inaccurate figures about an insurer’s financial condition for a very long time.

Depreciation charges for all of these non-insurance operations totaled $7.6 billion; capital expenditures were $11.5 billion. Berkshire is always looking for ways to expand its businesses and regularly incurs capital expenditures that far exceed its depreciation charge.

Amortization charges were an additional $1.3 billion. I believe that in large part this item is not a true economic cost. Partially offsetting this good news is the fact that BNSF (like all other railroads) records depreciation charges that fall well short of the sums regularly needed to keep the railroad in first-class shape.

sometimes I will make expensive mistakes. Overall – and over time – we should get decent results. In America, equity investors have the wind at their back.

Stocks surge and swoon, seemingly untethered to any year-to-year buildup in their underlying value. Over time, however, Ben Graham’s oft-quoted maxim proves true: “In the short run, the market is a voting machine; in the long run, however, it becomes a weighing machine.”

/swuːn/verbverb: swoon; 3rd person present: swoons; past tense: swooned; past participle: swooned; gerund or present participle: swooning1. LITERARYfaint, especially from extreme emotion."Frankie's mother swooned and had to be helped to the headmaster's office" 2. be overcome with admiration, adoration, or other strong emotion."you can have them swooning over you with a few well-placed words"
/ʌnˈtɛðə/verb;past tense: untethered; past participle: untethered;release or free from a tether."I reached the horses and untethered them"

Ben Graham’s oft-quoted maxim proves true: “In the short run, the market is a voting machine; in the long run, however, it becomes a weighing machine.”

– Ben Graham

This table offers the strongest argument I can muster against ever using borrowed money to own stocks. There is simply no telling how far stocks can fall in a short period. Even if your borrowings are small and your positions aren’t immediately threatened by the plunging market, your mind may well become rattled by scary headlines and breathless commentary. And an unsettled mind will not make good decisions.

Even if your borrowings are small and your positions aren’t immediately threatened by the plunging market, your mind may well become rattled by scary headlines and breathless commentary. And an unsettled mind will not make good decisions.

In the next 53 years our shares (and others) will experience declines resembling those in the table. No one can tell you when these will happen. The light can at any time go from green to red without pausing at yellow.

When major declines occur, however, they offer extraordinary opportunities to those who are not handicapped by debt. That’s the time to heed these lines from Kipling’s If:

“If you can keep your head when all about you are losing theirs . . . If you can wait and not be tired by waiting . . . If you can think – and not make thoughts your aim . . . If you can trust yourself when all men doubt you . . . Yours is the Earth and everything that’s in it.”

adrenaline: This assemblage was an elite crew, loaded with brains, adrenaline and confidence. [funds managers]

Though markets are generally rational, they occasionally do crazy things. Seizing the opportunities then offered does not require great intelligence, a degree in economics or a familiarity with Wall Street jargon such as alpha and beta. What investors then need instead is an ability to both disregard mob fears or enthusiasms and to focus on a few simple fundamentals. A willingness to look unimaginative for a sustained period – or even to look foolish – is also essential.

I want to quickly acknowledge that in any upcoming day, week or even year, stocks will be riskier – far riskier – than short-term U.S. bonds. As an investor’s investment horizon lengthens, however, a diversified portfolio of U.S. equities becomes progressively less risky than bonds, assuming that the stocks are purchased at a sensible multiple of earnings relative to then-prevailing interest rates.

Stick with big, “easy” decisions and eschew activity